WillScot Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing is by WillScot Corporation, the modular-space and portable-storage provider identified in the request as WillScot Holdings Corp. Amounts below are U.S. dollars.
Business context
WillScot leases, sells, delivers and installs modular buildings and portable storage across the U.S., Canada and Mexico. Leasing is its core business. At quarter-end, it reported approximately 120 locations, more than 50,000 customers, over 125,000 modular-space units and over 25,000 portable-storage units.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $255.8 million | $253.7 million | Up 0.8% |
| Gross profit | $106.2 million | $103.3 million | Up 2.8%; gross margin 41.5% vs. 40.7% |
| Operating income | $25.4 million | $21.5 million | Up $3.9 million |
| Net loss attributable to WillScot | $3.5 million | $9.3 million | Loss narrowed; diluted loss per share $0.03 vs. $0.09 |
| Adjusted EBITDA | $89.5 million | $83.4 million | Up 7.3% (non-GAAP) |
| Operating cash flow | $38.3 million | $15.3 million | Up $23.0 million |
| Free cash flow | $7.8 million | $(26.6) million | Improved $34.4 million (non-GAAP) |
Leasing and services revenue increased 5.4%, led by pricing and delivery and installation revenue. Modular leasing revenue rose to $188.4 million from $177.3 million. New-unit sales fell 35.1% and rental-unit sales fell 41.4%, partly offsetting leasing growth. Average modular-space monthly rent increased 13.6% to $653, while average units on rent declined 5.7% and utilization fell to 69.2% from 72.4%.
Interest expense was $28.3 million, down from $31.1 million, primarily following repayment of the 10% senior unsecured notes in 2019. Rental-equipment depreciation rose $4.8 million to $45.9 million. Adjusted EBITDA is a non-GAAP measure and is not equivalent to cash available for debt service or investment.
Liquidity, debt and balance sheet
At March 31, 2020, cash was $4.6 million, total assets $2.86 billion, and total equity $681.1 million. Long-term debt carrying value was $1.626 billion, compared with $1.633 billion at year-end 2019. Debt comprised the ABL facility and secured notes due 2022 and 2023. The company reported $505.8 million of available ABL borrowing capacity and compliance with debt covenants. Current liabilities of $313.3 million exceeded current assets of $289.9 million.
Operating cash flow of $38.3 million funded investing outflows of $30.5 million; financing used $5.6 million, including $45.3 million of borrowings repaid and $35.8 million borrowed. Cash increased $1.6 million during the quarter. Management stated that liquidity and operating cash flows were expected to cover operating, debt-service and capital requirements over the next 12 months.
Material changes, outlook and risks
- COVID-19: Management said Q1 operations were not significantly affected, but business and financial results had been adversely impacted after the pandemic declaration and could be further affected. Demand varied by end market; special events and sports and entertainment weakened, while healthcare demand increased and construction remained active with disruption. Risks include project delays, equipment returns, customer payment delays or defaults, supply interruptions and potential asset impairments.
- Mitigation: The company described compensation, hiring, overtime, labor and discretionary-spending reductions, as well as the ability to reduce or defer fleet and other capital spending. It cited recurring lease revenues and available ABL capacity as liquidity supports. No quantified earnings or revenue guidance was provided.
- Mobile Mini transaction: WillScot agreed to acquire Mobile Mini in a stock merger, with each Mobile Mini share to receive 2.4050 WillScot Class A shares, subject to customary conditions, regulatory and shareholder approvals. Closing was expected in Q3 2020. WillScot expensed $9.4 million of merger transaction costs in Q1 and arranged committed financing to refinance specified existing facilities and Mobile Mini debt.
- Unusual costs and other items: Management cited $12.7 million of discrete acquisition and integration-related costs, including merger transaction costs, integration costs and lease impairment or restructuring charges. No goodwill impairment was recorded in Q1, but management cautioned that COVID-related economic changes could alter future estimates. The company recorded a $3.4 million provision for doubtful accounts.
- Other risks: Results remain exposed to end-market demand, customer credit and collections, interest and foreign-exchange movements, and execution and financing risks related to acquisitions. The company had no material pending legal proceedings reported and said it was in compliance with debt covenants.
Key facts for investors to verify
- How pandemic-related demand, utilization, customer collections and credit-loss provisions developed after March 31, 2020.
- Whether the $505.8 million of ABL availability remained accessible as borrowing-base values and business conditions changed.
- The Mobile Mini merger’s approvals, closing timetable, financing terms, integration costs and expected impact on leverage and share count.
- Whether higher rental rates can offset lower units on rent and utilization, and whether the Q1 improvement in free cash flow is sustainable.
- Potential impairment exposure for goodwill, rental equipment, property and intangible assets under changing economic assumptions.